A NEW CAREER IN A NEW TOWN: HOW BERLIN HAS BECOME A CENTRE FOR EUROPEAN VENTURE CAPITAL / THE ECONOMIST

A new career in a new town

How Berlin has become a centre for European venture capital

Once edgy, the tech scene is in danger of going mainstream

For brits of a certain age and inclination, Berlin is a city that is forever linked with David Bowie. When he lived there in the late 1970s, Bowie’s life was in flux. He was estranged from his wife, splitting from his management and trying to slough off rock-star excess. 

Berlin was similarly unsettled: a refuge for artists, misfits and draft-dodgers on the front line of the Cold War. Bowie lived anonymously above a car-parts store. He did some of his best work there.

The block of flats where Bowie lived with Iggy Pop, another celebrated rock star, still stands. Berlin remains an edgy, in-between sort of place—it is Germany’s capital, but is not quite German. And it remains a place where people go to try something new. It now vies with London and Paris as Europe’s leading hub for technology startups.

That seemed unlikely a decade ago. Berlin had no real industrial base. Its early venture-backed successes were often knock-offs of American e-commerce firms. Risk capital was scarce. Berlin had no vast ranks of home-grown techies. In a strange way, these and other deficiencies have been strengths. 

For Berlin has no competing hierarchy for all-important status. Paris has fashion and food. London has famous musicians. In Berlin, the venture capitalists (vcs) and entrepreneurs are the rock stars.

Berlin’s vc scene emerged in the years following the global financial crisis of 2007-09. 

The city had three things to recommend it. First, it was cheap. Berlin was a poor capital city by the standards of Western Europe. The only competing industry was government. So housing and office space were plentiful. 

If you were part of the early wave of startups that settled in the city, you might be offered office space rent-free for several months. Second, it was hip. There were lots of cheap, cool places to eat and to meet others. Part of the allure was Berlin’s history as a bolthole for creative types, such as Bowie and Iggy.

A third factor is that Germany is welcoming to migrants. Berlin has always been a cultural melting pot. High youth unemployment in southern Europe in the wake of the euro area’s debt crisis was a spur to migration. A lot of engineers came from Eastern Europe. 

The Swedish founders of SoundCloud, a music-streaming site to which independent artists upload their output, based their company in Berlin, despite a vibrant scene in Stockholm. Often the working language is English; but it might be Russian or Portuguese. Plenty of people have poured in from other German cities, too. 

That reflects a cultural shift. A talented engineer who used to go to work for bmw or Mercedes now thinks about starting a company, says Ciaran O’Leary of BlueYard, a Berlin-based venture-capital firm.

The idea that one capital will dominate Europe is seen as old hat. Berlin’s vc firms typically invest in startups in other European cities, which are all a short hop away. A lot of the money they deploy comes from outside Europe—from America or Asia. In Berlin this is mostly seen as a strength, an external validation. 

Another outdated notion is that Berlin is a location for “shallow tech”, rather than original ideas. That is in part the legacy of Rocket Internet, a Berlin-based “clone factory”, an incubator that aped the business models of America’s online firms. But Berlin had to start somewhere, and there has since been a shift from consumer clones to tech startups that serve businesses.

The pandemic may be a kind of coming of age for Berlin’s tech scene. Two of its listed graduates—HelloFresh, which sells meal kits, and Delivery Hero, a food-delivery firm—have been bolstered by it. Tech looks more than ever a better bet than Germany’s old industries, such as carmaking. 

Even the government has taken notice. Its stimulus package included tailored support for startups. “It was the first time the government listened to us and heard what we need to do to build a strong ecosystem,” says Christian Miele of the German Startup Association. 

There are hopes of a change to the tax treatment of share options, a bugbear of vcs. 

From a frayed and frazzled San Francisco, though, the stodgier bits of the German model (its bureaucracy, health care and social-safety-net) might now seem rather enviable.

With time, the hip becomes conventional. Bowie’s Berlin-period recordings were not universally embraced on their release. But by the 1980s every other pop group in Britain claimed them as a big influence. 

Similarly, Berlin’s vc hipsters no longer look like misfits. Its tech scene is in danger of going mainstream.